Dollar Requests Congressional Support To "Improve PCA"

GRAND RAPIDS, Mich.-Following up on an idea he floated during a hearing on regulatory relief, NCUA Chairman Dennis Dollar has submitted his draft for a risk-based Prompt Corrective Action program to Congress. Dollar announced the submission of his draft to "improve the one-size-fits-all PCA law" during a speech to 600 attendees of the 69th Annual Meeting of the Michigan Credit Union League last week. He explained that the current law inhibits credit union growth and proper business planning because it "fails to properly reward solid risk management decisions and penalizes planned and balanced credit union growth." Dollar's language would amend the definition of net worth ratio, with respect to a credit union, from "the ratio of the net worth of the credit union to the total assets of the credit union" to "the ratio of the net worth of the credit union to the risk assets of the credit union as defined by the Board." The net worth ratio calculation would then place `retained earnings' in the numerator and `risk assets' in the denominator: retained earnings/risk assets. Currently `total assets' is in the denominator. Additionally, Dollar asked that NCUA be permitted to define `risk assets' by regulation. "The flaw in the present system of PCA is that it focuses from the outset on all assets, instead of concentrating exclusively on risk assets that are the true source of the risk of loss and that will reflect a credit union's ability to manage risk," Dollar wrote in his explanation of the amendments to Congress. "The present risk-based net worth requirement simply comes too late in the process; it identifies risks that a 6% net worth ratio may not protect against only after the broad focus on all assets has depressed a credit union's net worth ratio." Following a more risk-based approach to PCA, the provisions of the law regarding complex credit unions could be repealed, he suggested. "I believe strongly in a regulator taking prompt corrective action any time a financial institution has net worth problems and any regulatory actions should certainly be taken before the problem becomes severe and may jeopardize the institutions," Dollar told the audience of the Michigan Credit Union League conference. "However, any trigger for taking such action requires the evaluation of the risk in the institution. Every credit union with 7% net worth does not have the same risk profile, but yet PCA says that any credit union with at least 7% net worth is well capitalized. This one-size-fits-all approach is just not reasonable in what is inherently a risk-based process." He added that he would strongly oppose Congress lowering the PCA standards, but believes they should be risk-based. -scooke@cutimes.com